OCTOBER 17, 2011 VOLUME 18 NUMBER 36
Lawyers are ethically prohibited from charging excessive fees. Period. It doesn’t matter if the lawyer has a fee agreement calling for an excessive fee. It doesn’t matter if the negotiated fee seemed reasonable at the time, but turned out to be excessive as things developed. It doesn’t matter if the lawyer’s intentions were good, the lawyer took on quite a bit of unusual risk, or the client was smart enough that he or she should have figured out the bargain was bad. Lawyers simply can not charge an excessive fee.

Of course that strong statement often begs the real question: what is an “excessive” fee? If the lawyer takes a difficult personal injury case on a contingency basis, and then collects a very big settlement or judgment, is it excessive if her fee runs into the millions of dollars? Is it excessive if another lawyer’s percentage fee turns out to be a $2,500/hour windfall for the work done? Not necessarily, but those kinds of analyses are often used to test whether a fee is excessive.

Let’s imagine a client (we’ll call her TG) is represented by an attorney in a personal injury action. The attorney signs a standard fee agreement with her, providing a 1/3 contingency fee for his representation of her. The attorney works hard, has some hurdles to overcome, but ultimately secures a settlement of about $75,000. Is the attorney’s $25,000 fee “excessive”?

Probably not. Even if TG becomes unhappy with her lawyer, and tries to fire him after the settlement. Even if the lawyer, worried about her ability to handle the settlement proceeds, works to set up a special needs trust — which limits her access to her settlement proceeds.

Now, unhappy with her first lawyer and her special needs trust, TG hires a new lawyer — let’s call him Everett E. Powell, II. She tells Mr. Powell that she wants to get the money in her special needs trust and to spend it in whatever way she chooses. She signs a new 1/3 contingency agreement with Mr. Powell, and he agrees to try to terminate the trust.

Termination of a special needs trust can sometimes be complicated, and may even be impossible. In TG’s case, that turned out not to be the situation. Mr. Powell wrote to the trustee, expressed his client’s wish to terminate the trust, and heard back almost immediately. The trustee told Mr. Powell that he, the trustee, would resign. Furthermore, he would exercise his authority to select a successor trustee by naming Mr. Powell to the position. Then Mr. Powell could, if he chose, distribute all the special needs funds to TG and terminate the trust.

The trustee warned Mr. Powell: if you do what your client wants, and she spends the money quickly, there’s nothing to stop her from turning on you and claiming you breached your duty as trustee to protect her from herself. Mr. Powell decided that was a risk he was worth taking; he received a little more than $44,000 (representing the entire trust balance), signed a check to himself for $14,815.55 and transferred the remaining $29,429.62.

Within three days, Mr. Powell had accomplished his client’s wish to terminate the trust (though, technically, he had not; there was still a $600 balance in the trust, which slowly disappeared over a four-year period because of bank fees). Mr. Powell did not provide any accounting or tax services, and did not exercise any discretion as his client’s trustee — other than to distributed the bulk of the trust assets to her and pay himself a contingency fee.

Was his fee “excessive”? Yes, said the Indiana Supreme Court hearing officer who heard his ethics case. The hearing officer recommended discipline, and the Indiana Supreme Court agreed. Mr. Powell was suspended from the practice of law for 120 days, and required to reapply for admission to the bar if he intends to continue practicing law after that four-month period.

When imposing discipline, state Supreme Court justices usually consider aggravating and mitigating circumstances. In Mr. Powell’s case, the justices found that Mr. Powell was not remorseful, did not have insight into his mistake, did not cooperate with the investigation, and lied to TG’s first lawyer/trustee (he had represented that he intended to manage the trust and continue it for TG’s benefit). On the other hand, Mr. Powell had not had any prior disciplinary history — of course, he had only been a lawyer for a few months at the time of his misbehavior.

What made the fee “excessive”? The Court reviews the elements of an appropriate fee and offers some guidance. But there is no clear formula. The Court makes clear that a fee in excess of the amount of work actually involved is not necessarily excessive. Nor is every contingency fee suspect. But when, as here, a minimal amount of work is required in a very short period, a fee of almost $15,000 simply can not be justified. Matter of Powell, September 29, 2011.

4 Responses

Interesting subject. Colorado’s last legislative session passed a new Probate Compensation statute which, in part, deals with this issue. Colorado had a long standing Supreme Court ruling that you couldn’t have contingency fees in probate cases. The new statute overrides that case. But, even under the new statute, the reasonableness of the fee is still the crux of the issue.

The attorney is always subject to Rule 1.5 of the Rules of Professional Conduct, and, as Robert suggests, even where there is a written fee agreement, a reasonableness standard applies.

Mark

Fair question. The general ethical rule is that a lawyer’s fee must be “reasonable” even if contracted for. So a lawyer who literally wrote a single letter and then received a contingency fee of 1/3 of a large settlement amount would probably have to forego a portion — perhaps a large portion — of his or her fee. That would be true even if there was a contract, even if the client said “no, you keep the entire fee,” even if the lawyer was especially talented.

State ethical rules will vary somewhat, but they all have similar conceptual underpinnings. Of course the devil is in the details — what looks “excessive” to one person may look “reasonable” to another, and both may have vested interests.

Contingency fees are often analyzed by considering (among other elements) the other opportunities the lawyer decided to forego in order to take on the representation, the special skills of the lawyer, the risk borne by the lawyer (that, for instance, there might be no recovery at all), and the costs advanced by the lawyer. But even in this arena, excessive is excessive.

Robert B. Fleming
Fleming & Curti, PLC
Tucson, Arizona

Ber Rupar

As a consumer, I have a question about attorney fees. Is a standard 33% fee negotionable? To me this percentage is extreme in a PI case or another case for that matter. Many times the clients award must go towards unpaid medical bills. What is left for aftercare if the award is, for example $100,000. Is the client charged again for the setting up of a special needs trust? Also what is an ethical fee for setting up a SN Trust? What’s left to put into the trust? As someone who has been through an PI case (permanently injured) and the parent of a SN young adult, I’d like to know.